Working Paper: NBER ID: w10431
Authors: Michael D. Bordo; Joseph G. Haubrich
Abstract: This paper brings historical evidence to bear on the stylized fact that the yield curve predicts future growth. The spread between corporate bonds and commercial paper reliably predicts future growth over the period 1875-1997. This predictability varies over time, however, particularly across different monetary regimes. In accord with our proposed theory, regimes with low credibility (high persistence of inflation) tend to have better predictability.
Keywords: Yield Curve; Recessions; Monetary Regime; Predictive Ability; Inflation Persistence
JEL Codes: E43; E42
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| credibility of monetary regime (E42) | yield curve's predictive ability (G17) |
| low credibility and high inflation persistence (E31) | better predictability of yield curve (G17) |
| prevailing monetary regime (E42) | yield curve's ability to predict growth (O47) |
| predictive power of yield curve (E43) | robustness despite suggestions of diminishment (E32) |
| yield curve (E43) | future economic growth (O49) |
| yield curve inversions (E43) | economic downturns (F44) |
| term spread (C41) | real GNP growth (O49) |
| term structure (E43) | predictive power in analyzed subperiods (C41) |